How To Overcome USDA Loan Denials
What disqualifies a home from USDA financing? And just as importantly, what can you do to avoid such hazards?
USDA loans are government-backed mortgages. They’re designed to help low- and moderate-income buyers purchase homes in rural and suburban areas. Qualified borrowers can buy with nothing down. They also feature flexible credit standards, no prepayment penalties, and mortgage insurance costs that are lower than FHA financing.
There are qualification requirements, as there are with all forms of mortgage financing. To be eligible, a borrower must meet income, employment, and credit requirements. The property also has to meet certain requirements – namely, that it’s safe and structurally sound and in what the USDA considers a qualified rural area.
There are pages and pages of requirements, and – no doubt about it – not every USDA application is successful. That said, lenders do not expect mortgage borrowers to be perfect. The result is that experienced mortgage lenders can often help borrowers obtain mortgage financing even when applications include a few dings.
Every prospective homebuyer’s situation is different. Borrowers must meet guidelines set by both the USDA and individual lenders. The reason there are two sets of standards is that while the government backs these loans, it doesn’t fund them. Instead, the money comes from private loan sources.
The USDA program is a guarantee plan. If something goes wrong with the loan, the government will help lenders avoid losses. With government backing, lenders are willing to finance and refinance home purchases with nothing down and other attractive features.
The government has certain requirements which must be met before it will guarantee a loan under the USDA program. While lenders generally go along with USDA standards, there are also cases where they have additional requirements to avoid what they regard as excess risk.
Mortgage applications are accepted or declined through a process called underwriting. What happens is that your information is compared with loan requirements. This is usually done automatically with the USDA’s automated underwriting system. It’s called the Guaranteed Underwriting System, or “GUS” for short.
If GUS does not accept an application, then often it’s possible to manually underwrite a loan. Broadly, here’s a look at some potential reasons for a loan denial – and what to do about it.
Things like unverifiable income, undisclosed debt, or just having too much household income for your area can cause a loan to be denied.
Solution. Get pre-approved with a USDA loan specialist before you formally apply for a loan. This will give you a clear sense of your income and debt situation and what might be possible.
If you lost your job or changed jobs in the middle of the application process, that can be a red flag. The USDA requires you to have a regular source of income, so if you’ve lost your job or been laid off, you may no longer qualify. On the other hand, there are maximum income requirements for USDA loans, so if you got a great new job with a great new paycheck, you may now be making too much money to qualify.
Solution. You must meet USDA income requirements. If you have a new and better job, it does not mean you cannot become a homeowner, it just means that a different financing option may be a better choice. Speak with your USDA lender regarding potential choices.
You’ll need to meet a lender’s credit score benchmark . Changes to your credit profile once you’ve started the application process can lead to problems. If you’ve had bills sent to collection, opened up new lines of credit, or done anything else that lowers your credit score, that can cause your application to be denied.
Solution. Credit scores are based on the information contained in credit reports. Check your credit reports before applying for a mortgage to ensure that they are factually correct and do not include out-of-date items. You can obtain copies of your credit reports at no cost at AnnualCreditReport.com.
Part of the USDA mortgage underwriting process is to check borrower debt-to-income ratios (DTIs). The DTI ratios compare your monthly debt payments with your gross monthly income, the money you earn before taxes.
The USDA loan program looks at two types of DTI figures.
First, monthly housing expenses should be 29% or less. For example, if your gross monthly income is $7,500 then you can spend as much as $2,175 ($7,500 x 29%) for mortgage principal, mortgage interest, property taxes, and property insurance.
Second, as much as 41% of the borrower’s gross monthly income can be used to pay debts in general. General debts include auto loans, student debt, credit card payments, and housing costs. For a household with a monthly income of $7,500, the allowable amount is $3,075 ($7,500 x 41%).
Solution. Reduce debt levels and lower costs for several months before applying for a loan. Live frugally, especially after you make a loan application. Avoid costs that will show up on credit cards and credit reports. Do not take on new debt. Not only can holding down debt help with DTI ratios, it can also keep or improve credit scores.
If you’re above the 29/41 guidelines, you may still be able to get financing. Speak with your loan officer and see if compensating factors can be used to offset high DTI ratios. For example, good compensating factors include a strong credit history, savings, residual income (the cash left over after paying monthly debts), an energy-efficient home, a cash down payment, etc.
Buyers must purchase homes in qualified rural areas. Much of the country fits this definition, but not everywhere is eligible for USDA-backed mortgages.
Solution. To see if a property is regarded as “rural” by the USDA mortgage program, visit our eligible property map. Speak with your loan officer if you have any questions.
To get approved for a USDA loan, your property must be appraised. The USDA appraiser will check to ensure the home meets broad property condition requirements in addition to assigning a value to the property.
If the property you’re buying doesn’t meet the requirements – which include such issues as condition, roofing, foundations, electrical services, plumbing, and HVAC systems – repairs must be made, or the loan will be declined.
Another problem you can have with the appraisal is if your appraised value comes in too low.
Appraisers determine the value of the home by comparing it to the recent sale of similar properties nearby. If home values are declining or if there have recently been foreclosures, that can hurt the property’s appraised value.
If you’re under contract to buy a home for $110,000, but the appraiser determines the home’s value is $100,000, you either have to supply the additional $10,000 in cash, renegotiate the offer, or get a seller concession from the owner.
If interest rates have gone up since your pre-approval, and you were right on the edge of being approved, an increase in your monthly housing costs could suddenly mean a home is no longer affordable.
Try to borrow less. Perhaps a helpful relative can provide a gift, or maybe you can get help through a down payment assistance (DPA) program. The USDA program does not require a down payment, but if you can get down payment help it means the amount of the down payment will not be added to the loan amount. The result is that with DPA help you may qualify for financing because the loan amount and monthly payments will be smaller.
“USDA loans, like other mortgage programs, require borrowers to meet minimum credit standards, demonstrate a stable employment history and purchase a property that meets eligibility guidelines,” said Dan Bartelt, an underwriter at Neighbors Bank. “These are all the hallmark requirements for any mortgage approval. Many borrowers choose USDA loans because they require no down payment and have more flexible credit requirements than conventional loans.”
| Alabama | 20.9% |
|---|---|
| Alaska | 15.4% |
| Arizona | 19.4% |
| Arkansas | 20.6% |
| California | 20.8% |
| Colorado | 17.1% |
| Connecticut | 19.2% |
| Delaware | 20.9% |
| District of Columbia | 19.6% |
| Florida | 23.2% |
| Georgia | 21.6% |
| Hawaii | 23.3% |
| Idaho | 16.0% |
| Illinois | 18.4% |
| Indiana | 18.2% |
| Iowa | 12.5% |
| Kansas | 16.3% |
| Kentucky | 20.1% |
| Louisiana | 23.6% |
| Maine | 17.1% |
| Maryland | 20.9% |
| Massachusetts | 18.6% |
| Michigan | 19.9% |
| Minnesota | 14.1% |
| Mississippi | 23.6% |
| Missouri | 16.3% |
| Montana | 15.9% |
| Nebraska | 13.8% |
| Nevada | 20.2% |
| New Hampshire | 19.2% |
| New Jersey | 21.3% |
| New Mexico | 19.2% |
| New York | 21.6% |
| North Carolina | 19.4% |
| North Dakota | 10.8% |
| Ohio | 19.5% |
| Oklahoma | 18.6% |
| Oregon | 17.5% |
| Pennsylvania | 20.6% |
| Puerto Rico | 17.5% |
| Rhode Island | 22.7% |
| South Carolina | 20.5% |
| South Dakota | 12.5% |
| Tennessee | 18.6% |
| Texas | 20.8% |
| Utah | 16.7% |
| Vermont | 16.5% |
| Virginia | 19.2% |
| Washington | 18.4% |
| West Virginia | 22.5% |
| Wisconsin | 14.1% |
| Wyoming | 16.4% |
If your loan was denied in automatic underwriting, you can still try to get approved with manual underwriting.
Manual underwriting does not change USDA underwriting standards. Borrowers still have to meet program requirements. This may be possible by providing documentation and explanations for issues that did not pass muster with GUS.
You may need to find a different property, improve your credit score, or pay off some debt before you’re eligible for a USDA loan. Or, again, look into down payment assistance programs. Your loan officer may be able to suggest a DPA program that helps local borrowers.
Preparing for a USDA loan application starts with assessing eligibility. Borrowers should first verify that their household income falls within USDA limits for their area and ensure the property they intend to purchase is in an eligible rural location.
“USDA loans are unique in that household income must fall within the program’s annual income limits, based on family size,” Bartelt said. “Additionally, USDA loans have some of the strictest debt-to-income (DTI) requirements of any loan type. USDA loans offer zero down payment and affordable financing, but approval isn’t automatic. Proper preparation boosts your chances of approval and helps avoid delays. It’s highly recommended to work with an experienced mortgage lender before house hunting to confirm you meet USDA income limits and that your income and employment history align with mortgage approval requirements.”
Financial preparation is also key—maintaining a credit score of at least 640 can improve the likelihood of approval, while keeping a debt-to-income (DTI) ratio below 41% demonstrates financial stability. Proper documentation is essential, so applicants should gather recent pay stubs, tax returns, bank statements, and employment verification records to streamline the process.
Before applying, it's beneficial to consult a USDA-approved lender for pre-qualification, which helps identify potential issues early. During the application process, borrowers should avoid major financial changes, such as opening new credit lines or making large purchases, as these actions can negatively impact loan eligibility.
Lastly, staying informed about USDA loan guidelines is crucial, as policies and requirements may change over time. By taking these proactive steps, borrowers can strengthen their application and reduce the risk of denial.
